Credit card arbitrage: Easy, but dangerous money

One misstep can eat the profits and clobber your credit

By Craig Guillot | Updated: April 4, 2008

Credit card companies usually make money from consumers. For a few daring consumers, it's the other way around.

Some savvy consumers are taking advantage of some credit cards not just for zero percent interest rates, but to make money for themselves.

It's called credit card arbitrage and the concept is simple -- take a free or low interest loan from a credit card company, deposit it in a high-yield savings account, make the minimum payments on the card and pocket the difference. These consumers make money on the interest rate spread between money received and money paid -- just like a bank.

"If you've paid a lot of interest to credit card companies in your younger days, then this is a good opportunity to get some of that back," says Michael Milner, a personal finance blogger and part-time credit card arbitrager. "They'll make some money off of you, you'll make even more off of them and then you move on to the next one."

'Free money' from credit cards
Milner started experimenting with credit card arbitrage three years ago after he heard about it from posters on his blog. He estimates he has made a little more than $1,000 in "free money" by taking low or zero-interest loans from credit card companies and parking the money in high-yield savings accounts. Although, these days, high-yield is becoming harder to find. Still, there are some good teaser rates out there.

He doesn't view credit card arbitrage as an investment or a wealth building tactic, but says that for the financially disciplined it is an easy and simple path to extra money. Milner uses a spreadsheet with detailed formulas to track how much he can make on an offer and says that once the initial homework is done, all one has to do is monitor the monthly payments. He offers that spreadsheet, free, at his blog, Moneyspot.org.

Practice is little known
Consumers are unlikely to hear about credit card arbitrage from financial advisers or from credit card companies, but a search on the Web will reveal numerous bloggers and underground arbitragers who play the system to earn money from their credit card companies.

Jonathan, an anonymous personal finance blogger who opens his financial life to the public at Mymoneyblog.com describes credit card arbitrage as a "hobby that makes a little money on the side." He estimates that he has netted approximately $2,500 in arbitrage over the past three years.

"There are a lot of arbitrage mechanisms out there in banking and the bond and stock market. This is just one for consumers. A traditional bank has your money sitting there, then goes out and lends it for mortgages to take the spread. This is the same thing," said Jonathan.

Four steps to successful arbitrage
Following the steps of bloggers and others who have profited through credit card arbitrage, the key steps are simple:

1. Find a zero percent or low-interest cash advance or balance transfer card offer. Typically, these rates are temporary "teaser" rates, so you want one that lasts at least six months -- better yet, a year. Carefully check the terms, the rate, the balance transfer fee and determine how much you can make on the "spread" between interest rates. Create a spreadsheet that will track all payment due dates, terms and when to pay off the arbitrage.

2. Select an offer and write a check to yourself. Deposit it in a high-yielding, FDIC-insured online savings account, preferably earning 5 percent or more. CDs can occasionally yield a higher rate, but can also incur penalties if you need to cancel the arbitrage before the term is up.

3. Make all of the minimum monthly payments throughout the term of the offer, preferably via direct payment from a checking account so that you never risk late fees.

4. Pay off the remaining credit card balance one or two weeks before the offer ends and keep the remaining interest in the savings account.

Fee-free offers on the decline
Since many new cards don't always make the same offers for cash advances, cardholders can also take a cash advance on one of their existing cards and then transfer the balance to the new card. Milner says that while there used to be numerous fee-free offers, more companies are reverting to a fee on the transaction, and some are doing away with caps on the transfer fee.

Let's say you were lucky enough to land a no-fee, 0 percent rate for 12 months. You also found a savings account yielding 5.05 percent annually. That works out to $50.50 for every $1,000 of arbitrage, meaning $20,000 of successful arbitrage would net $1,010.

The table below shows a more common scenario with a 3 percent fee capped at $75.

Typical credit card arbitrage

Arbitrage amount

12-month return on 5.05%

3% balance transfer fee ($75 cap)

Profit

$1,000

$51.69

$30

$21.69

$10,000

$516.85

$75

$441.85

$25,000

$1,292.14

$75

$1,217.14

$50,000

$2,584.27

$75

$2,509.27

The profit is taxable income, with the amount of tax depending on your income bracket.

The risks of credit card arbitrage
Most arbitragers stagger their offers and carry balances on numerous cards. That can make for tricky and time-consuming monitoring. And that makes credit card arbitrage a game that only the disciplined and financially savvy should play.

It is not recommended for those who have a skimpy financial background, have trouble paying their bills or can't pay attention to the details. It should also not be attempted by those with already outstanding (nonarbitrage) credit card debt or those without cash reserves for unseen emergencies. While reading the fine print, scheduling automatic payments and abiding by the terms can almost guarantee profits, credit card arbitrage is one mistake away from financial disaster.

"It's kind of like a high-wire act. You have to know what you're getting into before you do it. It's a skill-based game and you have to be very vigilant. If you make a single late payment, it can all start falling apart quickly," says Jonathan.

One mistake brings severe consequences
While the credit card arbitrage game may net some easy money, there are a number of serious downsides, including the fact that failure to read the fine print or details in offers can result in diminished profits or even a loss. Being late on a single payment, even by a day, can also void the offer and reset the credit card account to a much higher interest rate. Arbitrage holders must also park the money in FDIC-insured savings accounts or certificates of deposit and resist the temptation to invest in the stock market or other volatile investments.

Maxing out credit limits can also put a significant dent in a person's credit score. That can take a while to repair, even once the arbitrage is paid off. As a result, arbitrage should not be engaged in by people planning a major purchase such as a home or vehicle in the next year since it can minimize lending capacity.

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